Yes, you can use Bluetooth for replacing the network cable, BUT, consider that Windows 98 support isn't always present, check the dongle's manual or manufacturer's website for more info.
Secondly, Bluetooth wasn't meant to be used in networks, it is meant to be used for connecting two devices to one another, so the performance won't be great (I think 1 mbps is the max). Though you may find Bluetooth solutions which can be used in networks, but it's more a trial and error thing. Security is also an issue, I don't know if some Bluetooth devices support encryption, if not, the signals are splurted all around and can be read by everyone with a computer equipped with Bluetooth and who is within the range.
Thirdly you must know that there are two types of Bluetooth: Bluetooth and Bluetooth Class 1, the first one has a range of 10 meters and the second one has a range of 100 meters.

I think the best option for you is to choose WLAN. Unlike Bluetooth, this is made for networking solutions, supports encryption (not sure about this, maybe Bluetooth supports it, but I have never seen it) and has a higher bandwidth (minimum is 11 mbps, 5.5 mbps with encryption enabled, if you have a > 1mbit internet connection, this is THE solution). Also this is better supported in Windows 98, though it still depends from manufacturer to manufacturer if they support it.

I can add two a few tips, watch out for how you install with WIN98 (I do HOPE you have SE!) because it may not be per default, you may have to follow special procedure. Also it is entirely possible you'll find the dongle getting "lost" on booting and the answer to this is you need to put a special "delay" mechanism in so that the network device does not start looking for things until 98 has got the relevant service (forget whch one) up and running....

But it is very possile and a very bad idea to think it is what bluetooth is meant for.

Last but not least - for maximum range have both dongle and arial with same alignment (IE vertical, horizontal etc). and do not expect maximum range unless it is true line of sight and no one walks through the signal

yeah i have bluetooth i actually used it for what u wanted to do, it could get my laptop in the living room from my computer in my room, and since i only used it for internet not like heavy networking it was fine, but u have to remmber that there are different bluetooth dongles, the msi is the best one and very cheap can get really far range. but wifi is better ofcourse for what u wanna do